Finance: Happy New Year
- Jan 12, 2009
Thank you to our friends at CPN for arranging this opportunity. Hopefully, this will give us in the industry a new communication vehicle that not only provides a platform for opinions but perhaps some worthwhile interaction.
With the start of 2009, we are leaving behind perhaps the worst year in commercial real estate finance since the Great Depression. Maybe – if measured in the amount of the fall from what we had to where we are now – the worst ever. It was a year of fundamental correction so extreme that it effectively closed down the entire commercial mortgage backed securities business. Plenty of finger pointing, but the bottom line is that every element of the industry shares some responsibility.
The only consistently active source of real estate debt, Fannie Mae and Freddie Mac have kept the capital flowing into the rental multi-family sector and largely saved it from the pain suffered in other commercial real estate sectors where capital has been severely restricted.
What do we expect in 2009? Virtually all of the experts are forecasting a continued drop in commercial real estate values combined with poorer property performance and continued expensive and restricted capital. The condition of the economy and empirical evidence seem to point only in this down direction. The cost of debt and the amount of leverage currently available clearly support this conclusion. Long-term, fixed-rate debt is commonly quoted at 60% LTV or less and at record-high spreads.
That all said, there is investment capital still looking for a home and at the adjusted prices, commercial real estate investments of all types will become more compelling. Certainly most investment alternatives have proven to be at least as volatile. We will see those with courage and vision take advantage in 2009. In many cases, those same investors that pulled back in 2005-2007 as the pack raced by them will be those that come back first.
When you’re at the absolute bottom of a cycle, all the evidence will continually point down; that’s when the money will be made by those that have the capacity – and courage – to act. Expect that to happen in 2009. Whether it’s buying CMBS, taking a public company private or buying the real estate directly, five years from now we will be admiring those that acted at this bottom.